An  Elastic  Currency 


GEOROE  SNIITH'S    MONBY"    IN   THK 
Karly    NORTHWKST. 


AN  ADDRESS    TO    THE    AMERICAN    BANKERS'   ASSOCIATION  AT 
CHICAGO,    OCTOBER  19,    1893. 


BY 


HORACE    :WHITE, 


PRICE,    6    CENTS    PER    COPY. 


NEW   YORK: 
The  Evening  Post  Job  Printing  House,   156  Fulton  Street. 

(Evening  Post  Building.) 
1893- 


HHHIh 


AN  ELASTIC  CURRENCY. 


Nearly  everybody  who  busies  himself  with  the  subject  of  finance  says  that  we  ought 
to  have  an  elastic  currency.  What  is  meant  by  that  ?  Evidently  it  means  a  currency 
that  will  expand  when  there  is  an  active  demand  for  it  and  contract  when  the  demand 
subsides.  This  suggests  another  query :  What  do  we  mean  by  demand  .''  The  demand 
for  money  is  nearly  universal.  It  is  as  great  among  the  loafers  around  the  City  Hall 
as  among  the  brokers  on  the  Stock  Exchange,  but  when  we  speak  of  the  demand  for 
money  we  do  not  mean  the  demand  of  either  beggars  or  speculators.  We  mean  the 
demand  for  money  to  carry  on  the  exchange  of  the  products  of  the  countr3%  which  m.ove 
at  certain  periods  and  years  in  larger  volume  than  at  other  periods  and  years. 

We  all  agree  that  the  currency  ought  to  be  elastic  in  the  sense  of  being  more 
abundant  when  the  exchanges  of  goods  are  rapid  and  extensive,  and  less  abundant 
when  the  contrary  condition  exists.  How  can  we  get  this  kind  of  a  currency  ?  We 
cannot  get  it  from  the  Government,  because  the  Government  cannot  know  when  the 
demand  for  money  is  increasing  and  when  it  is  diminishing.  The  Government  has  no 
commercial  barometer.  All  of  its  machinery  is  political.  The  loafers  around  the  City 
Hall  have  the  same  access  to  its  ear  as  the  merchants  and  the  manufacturers. 
Tammany  Hall  has  a  stronger  pull  on  it  than  the  Produce  Exchange.  The  advocates 
of  a  currency  issued  by  the  Government  tacitly  acknowledge  these  facts  when  they  go 
in  for  a  per  capita  currency.  They  have  no  measure  for  the  needs  of  the  community 
except  a  count  of  heads.  They  would  not,  however,  apply  this  rule  to  the  tribes  of 
Central  Africa.  Why  not?  Because  the  business  of  Central  Africa  is  not  like  our 
business.  So  it  appears  that  the  kind  of  business  should  be  taken  account  of  as  well 
as  the  number  of  people. 

That  is  all  that  we  contend  for.  The  Government  has  an  infallible  test  for  the 
numbers  of  the  people,  because  it  can  take  the  census.  But  it  has  no  .test  whatever  for 
the  state  of  business,  except  such  inferences  as  may  be  drawn  from  the  collection  of 
taxes.  I  believe  it  has  never  been  proposed  to  gauge  the  issuing  of  currency  by  the 
collections  at  the  Custom  House,  but  that  method  would  be  much  more  philosophical 
than  the  per  capita  method. 

ALL  TRADE  IS  BARTER. 

Money  is  introduced  to  facilitate  barter.  The  successive  steps  taken  by  mankind 
in  order  to  reach  the  present  trade  conditions  may  be  briefly  enumerated.  First,  the 
products  of  different  people  were  swapped  for  each  other.  Then  a  single  species  of 
property  was  taken  as  the  measure  of  all  other  kinds,  cattle,  for  example.  Then 
various  metals  were  successively  used,  iron,  copper,  silver,  gold.  But  the  march  of 
civilization  did  not  stop  here.  Bills  of  exchange  came  into  vogue,  and  banks  to  balance 
them  against  each  other.  These  bills  constitute  the  bulk  of  what  are  known  as  bank 
deposits.  The  genuine  bill  of  exchange  represents  goods  ready  for  consumption,  or 
materials  destined  to  be  converted  into  such  goods  and  actually  sold.  Such  goods 
and  materials  constitute  the  circulating  capital  of  the  country.  They  may  be  of 
domestic  or  of  foreign  origin,  or  of  both.  All  the  people  may  be  considered,  for  the 
purposes  of  this  discussion,  as  both  producers  and  consumers.  The  exchanges  which 
they  make  with  each  other  constitute  commerce,  and  the  money  problem  is  now,  and 
always  has  been,  how  to  effect  these  exchanges  with  the  least  amount  of  labor  and 
cost. 

BANK  CHECKS  AND  BANK  NOTES. 

It  was  long  ago  perceived  that  the  passing  of  gold  from  hand  to  hand  was  laborious 
and  costly,  and  in  most  cases  needless.  Pieces  of  paper  promising  to  pay  gold  came 
into  use  in  the  first  place  as  labor  saving  machines  merely,  to  avoid  the  trouble  of  car- 
rying gold  hither  and  thither.  All  Bank  of  England  notes  over  and  above  the  fiduciary 
issue  of  £15,500,000  are  of  this  type,  each  one  being  a  gold  certificate  of  deposit.   But 


M19443 


•  ••• 


other  paper  promises  came  into  existence,  which  avoided  not  only  the  trouble  of  carry- 
ing gold,  but  also  the  cost  of  having  it.  These  are  bank  notes,  as  we  understand  the 
term  in  the  United  States. 

Nearly  all  persons  know  what  bank  checks  are  and  what  function  they  perform,  but 
there  is  a  certain  mystery  to  the  popular  understanding  about  banknotes.  There  is  no 
difference  between  the  two  things  in  their  real  nature.  The  butcher  and  the  baker 
and  the  candlestick  maker  will  accept  their  customers'  checks  on  the  bank  because 
they  consider  them  good,  and  sometimes  their  creditors  will  accept  the  same  checks. 
If  the  public  generally  had  the  same  confidence  in  me  that  they  have  in  a  bank,  I  might 
issue  checks  in  the  similitude  of  bank  notes,  and  these  checks  would  pass  from  hand 
to  hand  as  long  as  there  was  a  demand  for  currency.  I  might  open  a  shop  for  the  dis- 
count of  commercial  paper  and  give  my  checks  to  the  parties  whose  paper  I  discounted, 
and  these  might  pass  into  general  circulation.     A  case  of  this  kind  occurs  to  me  now. 

"GEORGE  SMITH'S  MONEY." 

There  appeared  in  the  village  of  Chicago,  about  the  year  1834,  a  Scotch  youth 
named  George  Smith,  seeking  his  fortune  like  the  other  early  settlers  of  the  West.  Mr. 
Smith  had  the  banking  instinct  of  his  native  country  strongly  developed,  and  he  desired 
to  exercise  it  in  the  new  States  and  Territories  adjacent  to  Chicago.  Bank  charters 
were  scarce  and  hard  to  get  at  that  time.  None  could-  be  obtained  in  Illinois.  Mr. 
Smith  succeeded,  however,  in  obtaining  from  the  Territorial  Legislature  of  Wisconsin 
in  1839  a  charter  for  an  insurance  company.  This  was  called  the  Wisconsin  Marine  and 
Fire  Insurance  Company.  The  charter  contained  powers  for  insuring  against  fire 
and  marine  disaster  and  also  for  insuring  lives.  It  also  authorized  the  company  to 
"  receive  money  on  deposit  and  loan  the  same  on  bottomry  respondentia  or  other  sat- 
isfactory security.  *  *  *  Provided,  nothing  herein  contained  shall  give  the  said 
company  banking  privileges."  A  subsequent  clause  provided  that  if  the  company 
should  receive  on  deposit  any  bank  notes,  and  lend  them,  it  should  endorse  them  by  the 
signature  of  its  President  and  redeem  them  in  specie  in  case  the  issuing  bank  should 
fail.   The  act  was  passed  February  28,  1839,  and  was  to  continue  in  force  thirty  years. 

Although  some  of  the  functions  of  banking  were  embraced  in  the  charter,  the  ex- 
press prohibition  of  banking  ])rivileges  meant  that  the  company  should  not  issue  circu- 
lating notes.  Nevertheless,  Mr.  Smith  began  almost  immediately  to  issue  certificates 
of  deposit  in  the  similitude  of  bank  notes,  and  continued  to  do  so  until  the  General 
Banking  Law  of  the  State  went  into  force  in  1852.     Here  is  a  copy  of  one  of  them  : 

»3    [10]  Capital,  $500,000  Incorporated  1839. 

S  No.   [Cut  of  Ceres.  ]  36420. 

S  WISCONSIN  MARINE  AND  FIRE  INSURANCE  CO. 

.a 

vh  This  is  to  certify  that  J.  C.  Bates  has  deposited  with  this  Institution  Ten  Dollars 

-  which  will  be  paid  on  demand  to  bearer.     Milwaukee,  june  jrd,  /8jo. 

2,  Alex,  Mitchell,  Secy.  Geo.  Smith,  Pres.         [10] 

The  Wisconsin  Marine  and  Fire  Insurance  Company  started  with  a  paid  up  capital 
of  $8,104,  its  authorized  capital  being  $500,000.  It  grew  by  slow  degrees,  through 
prudent  rnanagement,  to  enormous  success.  Its  certificates  of  deposit  met  a  popular 
want.  They  were  issued  in  denominations  of  ^i,  $3,  $5  and  $10.  They  were  to  be 
found  in  people's  pockets  all  over  Wisconsin,  Illinois,  Iowa,  Missouri  and  Michigan, 
and  were  known  everywhere  as  "  George  Smith's  money."  They  eventually  reached 
a  circulation  of  i  1,470,235.     All  this  was  before  the  day  of  railroads  in  the  West. 

Mr.  Smith  understood  his  business  perfectly  and  omitted  nothing  to  keep  his  insti- 
tution in  good  credit.  He  not  only  redeemed  the  certificates  at  par  in  specie  at  the 
parent  office  in  Milwaukee,  but  he  established  agencies  at  Chicago,  Detroit,  Buffalo, 
Galena  and  St.  Louis,  where  he  redeemed  them  in  New  York  exchange,  at  the  cur- 
rent rate.  His  success  did  not  escape  the  notice  of  rivals.  There  were  systematic 
runs  on  his  institution  for  specie  and  they  were  always  met  with  abundant  bags  of 
coin.  These  runs  added  to  his  fame  and  to  the  popularity  of  his  money.  The  fact 
that  his  banking  business  was  carried  on  without  the  sanction  of  law,  if  not  in  direct 
violation  of  it,  was  often  discussed  by  those  who  had  "George  Smith's  money  "  in 
their  pockets.  I  often  heard  these  discussions  when  I  was  a  boy.  They  generally 
took  this  form :  "  Perhaps  George  Smith's  bank  is  not  according  to  law,  but  he  can 
make  more  money  by  being  honest  than  by  being  a  rascal." 


EFFORTS   TO   SUPPRESS    SMITH. 

The  Legislature  could  not  avoid  taking  notice  of  this  exercise  of  "  banking  privi- 
leges "  in  the  face  of  an  express  prohibition.  At  the  Session  of  1843  a  committee  was 
appointed  to  investigate  the  company.  A  report  was  made  in  the  following  year. 
The  finances  of  the  company  were  found  to  be  in  a  sound  condition,  but  it  had  issued 
upwards  ot  ^52,000  of  certificates  of  deposit  in  the  form  and  likeness  of  bank  notes  in 
violation  of  a  clause  of  its  charter.  Consequently  the  committee  recommended  that 
the  charter  be  repealed. 

A  few  days  later,  Alexander  Mitchell,  the  Secretary  of  the  company,  presented  to 
the  Legislative  Assembly  a  letter  protesting  against  a  repeal  of  the  charter  and  sug- 
gesting certain  amendments  to  it.  Subsequently,  and  while  the  report  of  the  committee 
was  still  pending,  he  presented  another  communication  denying  the  power  of  the 
Legislature  to  repeal  the  charter  and  contending  that  the  company  had  been  guilty  of 
no  violation  of  law.  The  question  of  violation  of  charter,  he  said,  could  only  be 
determined  by  the  courts.  Both  communications  were  referred  to  the  Committee  on 
Corporations,  which  presented  a  majority  and  a  minority  report.  The  majority  sided 
with  Mr.  Mitchell  and  held  that  a  court  of  law  was  the  proper  place  to  determine  the 
question  whether  the  charter  had  been  violated,  but  it  did  not  recommend  the  begin- 
ning of  a  suit  to  test  the  matter.  The  minority  recommended  a  joint  resolution 
ordering  that  such  a  suit  be  instituted  at  once.  There  was  a  rather  exciting  debate 
on  the  resolution,  which  was  finally  defeated  by  a  majority  of  two. 

In  the  year  1846  the  Legislature  repealed  the  charter  by  a  decisive  vote  in  both 
branches,  but  failed  to  pass  a  resolution  instructing  the  Attorney-General  to  institute 
proceedings  for  forfeiture.  The  only  notice  that  the  company  took  of  the  repealing 
act  was  to  issue  a  circular,  saying  :  "  The  recent  action  of  the  Legislature  of  the  Ter- 
ritory in  reference  to  this  institution  will  not  in  any  way  affect  its  rights  or  interrupt  its 
business.  This  notice  is  deemed  proper  for  the  information  and  protection  of  the 
holders  of  its  paper,  which  will  be  redeemed  by  its  correspondents  in  New  York, 
Buffalo,  Detroit,  Chicago,  Galena  and  St.  Louis,  as  heretofore."  The  circulation  of 
the  company  had  now  increased  to  $180,372,  and  went  on  increasing  with  great 
rapidity  till  it  reached  the  maximum  sum  already  mentioned. 

The  company  was  reorganized  under  the  Free  Bankmg  Law  of  Wisconsin,  and 
when  Mr.  Smith  retired  from  active  business,  as  he  did  shortly  before  the  war, 
Alexander  Mitchell  succeeded  him  as  President.  This  renowned  institution  failed  a 
few  weeks  ago,  to  the  profound  astonishment  of  all  who  remembered  George  Smith, 
whose  name  was  and  still  remains  a  synonym  for  solvency  throughout  the  North- 
west. I  met  Mr.  Smith  at  the  Reform  Club,  in  London,  a  few  years  ago,  where 
he  is  still  living,  and  where  he  is  known  as  "  Chicago  Smith,"  to  distinguish  him  from 
other  representatives  of  that  numerous  family. 

SIMILARITY   OF   THE   CHECK   AND   THE   NOTE. 

I  could  detain  you  a  long  time  with  matters  of  interest  touching  "  George  Smith's 
money,"  which  afterwards  included  a  bank  in  Georgia  as  well  as  the  reorganized  insur- 
ance company  in  Wisconsin,  but  the  point  I  wish  to  illustrate  is  that  a  check  on  a  bank, 
or  a  private  individual's  acceptance,  or  a  certificate  of  deposit  in  an  insurance  company, 
or  any  kind  of  shinpLister,  will  perform  all  the  functions  of  a  bank  note,  if  the  public 
have  the  same  confidence  in  the  issuer.  There  is  no  difference  between  the  check  and 
the  bank  note  as  regards  their  intrinsic  iiature  and  character.  Both  are  orders  on  the 
bank  payable  on  demand.  The  bank  note  circulates  more  widely  than  the  check 
because  the  credit  of  the  bank  is  better  known  than  that  of  private  individuals  who 
draw  checks,  and  because  greater  precautions  have  been  taken  against  forgery  and 
counterfeiting.  During  the  past  thirty  years  additional  and  absolute  credit  has  been 
given  to  bank  notes  in  this  country  by  the  Government's  guaranty.  It  is  customary  to 
say  that  the  noteholders  are  secured  by  a  pledge  of  United  States  bonds.  The  fact 
is  that  they  are  secured  by  the  Government's  guaranty,  and  the  Government  itself  is 
secured  by  four  different  cumulative  funds,  viz.:  (i)  Government  bonds,  (2)  the  5  per 
cent,  redemption  fund,  (3)  a  first  lien  on  the  bank's  assets,  (4)  a  first  lien  on  the  share- 
holder's liability.  The  noteholders  need  never  wait  a  moment  for  the  conversion  of 
any  of  these  assets  into  cash,  because  the  Treasury  is  required  by  law  to  redeem  all 
National  Bank  notes  on  presentation,  whether  the  banks  are  solvent  or  insolvent.  I 
hope  that  we  shall  never  see  any  less  prompt  and  infallible  redemption  of  bank  notes 
in  this  country, 


I  have  said  that  the  bulk  of  bank  deposits  consists  of  paper  representatives  of  the 
circulating  capital  of  the  country.  This  property  passes  from  hand  to  hand  by  means 
of  checks  and  bank  notes.  We  may  say  that  when  sugar  and  flour,  for  example,  ex- 
change for  each  other  by  the  car-load  they  exchange  by  the  medium  of  bank  checks 
and  when  they  exchange  by  the  barrel  or  the  pound,  they  exchange  by  the  medium  of, 
bank  notes.     It  is  the  difference  between  wholesale  and  retail. 

AN    ELASTIC   CURRENCY. 

A  perfectly  elastic  currency  would  be  one  which  should  rise  and  fall  in  volume 
pari  passu  with  the  quantity  of  sugar,  flour,  cloth  and  other  commodities  seeking  to 
De  exchanged  for  each  other.  There  are  large  sections  of  the"  country  where  banks  do 
not  exist,  and  where,  consequently,  bank  checks  could  not  be  made  available.  There- 
fore wholesale  transactions  as  well  as  retail  ones  in  the  great  farming  and  planting, 
mining  and  lumber  regions  must  needs  be  carried  on  with  currency  which  passes  from 
hand  to  hand,  and  remains  in  people's  pockets  for  considerable  periods  of  time.  All 
the  business  that  is  done  by  means  of  bank  checks  can  be  accommodated  as  well  at 
one  time  as  at  another,  for  the  reason  that  checks  do  increase  and  decrease  as  de- 
posits increase  and  decrease.  This  increase  and  decrease  is  largely  automatic,  but, 
not  entirely  so,  because  the  intervention  and  volition  of  the  banks  are  necessary  to  a 
perfect  working  of  the  machinery.  \  or  example,  a  wheat  buyer  or  a  cotton  buyer 
wants  ten  thousand  dollars  to  be  employed  immediately  in  moving  the  crop  in  his 
neighborhood.  He  makes  his  note  at  the  bank  or  offers  for  discount  a  draft  on  his 
Eastern  correspondent  secured  by  a  bill  of  lading.  The  bank  discounts  his  paper 
and  the  amount  is  immediately  credited  to  him  as  a  deposit,  and  will  be  drawn  mostly 
in  the  form  of  bank  notes  to  be  disbursed  among  the  farmers.  Take  another  case. 
Manufacturer  A  makes  a  hundred  cases  of  shoes  which  he  sells  to  Merchant  B  on 
three  months'  time.  A  takes  B's  note  or  acceptance  at  three  months,  gets  it  dis- 
counted at  his  bank,  and  the  amount  is  immediately  credited  to  him  as  a  deposit. 
This  will  be  drawn  chiefly  in  the  form  of  checks,  because  shoemaking  is  done  in  a 
city.  The  checks  will  be  drawn  to  pay  for  leather  and  other  materials  used  in  the  shoe 
trade,  but  a  certain  amount  will  be  required  in  the  form  of  bank  notes  to  pay  the 
wages  of  workmen.  The  checks  will  balance  other  checks  at  the  bank  or  the  Clearing 
House.  In  each  case  it  will  depend  on  the  volition  of  the  bank  whether  the  draft  shall 
be  discounted  or  not;  but,  as  this  is  what  the  bank  exists  for  and  derives  its  income 
from,  it  will,  in  ordinary  times,  discount  all  of  such  paper  that  is  offered  to  it  by  its 
regular  customers.  It  is  able  to  do  so  because  each  discount  is  a  deposit,  and  because 
the  checks  drawn  against  deposits  are  met  by  the  maturing  acceptances.  It  is  easy 
to  see  that  the  check  system  is  automatic  and  elastic,  and  that  it  accon^modates  itself 
to  the  volume  of  business  at  one  time  as  well  as  at  another.  It  is  not  quite  so  easy  to 
see  that  the  bank  note  system  may  be  automatic  and  elastic  in  the  same  way. 

Now,  our  problem  is  to  devise  a  system  where  the  bank  note  shall  be  elastic  like 
the  check,  and  in  like  manner  make  barter  a  science.  We  can  see  now,  if  not  before, 
why  the  Government  has  no  facilities  for  imparting  elasticity  to  the  currency.  It 
has  neither  the  requisite  knowledge  of  the  needs  of  business  nor  the  means  of  respond- 
ing to  them.  Even  if  it  had  an  oracle  to  keep  it  informed  of  the  needs  of  business, 
it  would  have  no  means  of  putting  the  money  where  it  is  needed,  unless  it  should  go 
into  the  business  of  discounting  commercial  paper,  in  which  case  it  would  have  to  re- 
ceive deposits  also  and  perform  the  other  functions  of  a  bank. 

ADVANTAGES   OF    BANK    NOTES. 

Returning  to  "  George  Smith's  money,"  which  played  so  large  a  part  in  the  early 
settlement  of  the  Northwest,  it  is  obvious  that  the  currency  which  he  issued  took  the 
place  of  other  kinds  of  money,  and  especially  of  specie,  for  which  the  products  of  the 
country  would  otherwise  have  been  sold.  On  condition  that  the  currency  should 
always  be  redeemed  in  specie  this  was  a  good  thing  for  the  holders  of  Smith's  money 
as  well  as  for  Smith  ;  that  is,  it  was  an  advantage  to  the  public.  It  was  an  advantage 
because  it  was  more  convenient  to  handle  and  carry  and  count,  while  it  performed  all 
the  local  exchanges  equally  well.  It  introduced  the  principle  of  barter  on  a  large 
scale.  Whatever  work  bank  checks  would  do  in  the  City  of  Milwaukee  George 
Smith's  money  would  do  over  the  greater  part  of  Wisconsin,  Illinois,  Missouri  and 
Iowa.  It  enabled  the  local  exchanges  to  be  carried  on  without  specie.  Exchange  on 
New  York  was  supplied  by  Smith  at  something  less  than  the  cost  of  sending  gold. 


A   SAVING   OF   CAPITAL. 

There  was  another  advantage  in  the  use  of  George  Smith's  money.  There  was  a 
painful  want  of  capital  in  the  Northwest  at  that  time.  If  the  community  had  been 
obliged  to  buy  gold  for  all  the  purposes  of  local  trading  it  must  have  parted  with 
capital  for  this  purpose.  So  there  would  have  been  less  capital  available  for  other 
uses.  Let  us  trace  the  course  of  any  given  sum  of  George  Smith's  money,  say  $10,000. 
He  lends  this  sum  to  a  wheat  buyer,  who  disburses  it  among  farmers,  who  pay  it  out 
to  country  store-keepers,  to  farm  laborers,  teamsters,  school  teachers,  clergymen,  doc- 
tors, etc.  By  and  by  it  gets  into  the  hands  of  the  city  merchant  who  needs  to  make 
remittances  to  New  York  and  Boston.  He  takes  the  notes  to  Smith  and  gets  drafts 
on  those  cities  at  the  current  rate  of  exchange.  It  is  of  no  use  for  him  to  draw  gold 
for  the  notes  because  he  cannot  send  it  to  New  York  and  Boston  as  cheaply  as  he  can 
buy  Smith's  drafts.  Smith  keeps  no  more  gold  on  hand  then  the  amount  that  will 
probably  be  called  for.  The  difference  between  this  amount  and  the  amount  of  his 
outstanding  currency  is  a  saving  to  the  region  where  the  currency  circulates. 

You  will  ask,  Who  gets  the  profit  ?  First,  Smith  gets  it,  but  he  does  not  get  all  of 
it.  The  farmers  would  have  received  gold  for  their  wheat  if  they  had  not  taken  Smith's 
notes,  but  they  would  have  been  obliged  to  wait  till  the  wheat  could  be  sent  to  the 
Eastern  market  and  the  proceeds  returned,  or  if  they  did  not  wait  somebody  must, 
and  this  somebody  must  needs  be  reimbursed  out  of  the  crop  for  waiting. 

Again,  if  the  proceeds  of  the  crop  came  back  in  gold,  it  could  not  come  back  in  the 
form  of  ploughs,  axes,  nails  and  other  goods,  this  being  the  preferable  form.  Of  course, 
the  time  would  come  when  the  country  would  be  saturated  with  gold,  so  that  no  more 
need  be  imported,  but  the  progress  of  the  community  would  be  retarded  and  its  com- 
fort lessened  by  the  withdrawal  of  capital  for  this  purpose.  So  you  see  that  while 
Smith's  profits  were  large,  indeed  disproportionately  so,  he  did  not  alone  reap  the 
advantages  of  a  paper  medium  of  exchange,  which  was  sound  in  fact  although  unsound 
in  principle.  It  was  sound  in  fact  because  Smith  was  a  genius  in  his  profession.  It 
was  unsound  in  principle  because  it  was  not  accompanied  by  safeguards  to  protect 
the  public  against  knaves  and  fools.  Of  these  the  Northwest  had  a  large  experience 
after  Smith  had  retired  at  the  age  of  50  to  his  native  land  with  a  fortune  estimated  at 
ten  million  dollars,  which  was  at  that  time  not  exceeded  by  more  than  three  in  the 
United  States,  and  not  a  dollar  of  which  had  been  gained  by  dishonest  means.  How 
much  money  Mr.  Smith  might  have  made  if  he  had  continued  in  business  till  this 
time,  I  tremble  to  think.  Being  a  bachelor  of  frugal  habits  he  probably  thought 
that  ten  millions  was  enough.  I  commend  him  to  all  here  present  as  an  instance  of 
moderation.     The  stoic  philosopher  Seneca  is  hardly  a  more  shining  example. 

NO   LIMIT   TO   GOOD    BANK   NOTES. 

George  Smith's  money  was  an  elastic  currency.  There  was  no  limit  to  his  issues  • 
because  they  were  all  ahke  illegal.  Being  without  limit  he  discounted  all  the  paper 
that  he  considered  good.  He  could  do  this  because  as  much  was  running  off  as  was 
coming  in.  He  gave  his  own  paper  payable  on  demand  for  that  of  merchants  payable 
at  a  fixed  time.  His  own  paper  passed  from  hand  to  hand  and  might  stay  out  a  whole 
year.  In  the  fall,  when  the  crops  began  to  move,  there  was  no  lack  of  money  for 
legitimate  trade,  because  it  was  as  easy  to  put  out  these  certificates  at  one  time  as  at 
another.  In  the  winter,  when  lake  navigation  was  closed  the  certificates  answered  all 
the  purposes  of  a  local  circulating  medium.  In  the  spring,  when  the  steamboats  began 
to  move,  bringing  new  settlers  and  cargoes  of  goods,  the  certificates  came  back  to 
headquarters  mainly  for  the  purchase  of  New  York  drafts,  after  which  they  took  their 
usual  round  again.  These  New  York  drafts  were  a  part  of  the  general  system  of  barter 
on  a  large  scale. 

I  have  said  that  under  the  George  Smith  regime  there  was  abundance  of  money 
for  legitimate  trade.  This  means  simply  that  for  the  purpose  of  bartering  the  con- 
sumable products  of  the  country  against  each  other  there  was  no  lack  of  instruments 
of  exchange.  It  is  not  a  banking  function  to  furnish  capital  for  the  building  up  of  a 
new  country  or  for  permanent  works  of  any  kind.  Most  of  the  misfortunes  that  have 
overtaken  banks  in  this  country  have  resulted  from  loans  to  speculators,  such  as  ad- 
vances to  railway  builders,  to  real  estate  owners  and  the  like.  No  currency  will  ever 
be  elastic  enough  to  satisfy  such  wants.  Suppose  that  the  strongest  bank  in  New 
York  should  undertake  the  building  of  hotels  as  a  part  of  its  regular  business.     How 


6 

long  do  you  think  it  would  be  the  strongest  bank,  or  any  bank  at  all  ?  Every  prudent 
depositor  would  draw  his  money  out  because  he  would  know  that  hotels  are  not  quick 
assets.    They  cannot  be  realized  on  in  sixty  or  ninety  daj  s. 

NATIONAL    BANK   CURRENCY   NOT   ELASTIC. 

I  think  that  everybody  who  has  followed  this  discourse,  which  is  largely  a  narrative 
of  facts  familiar  to  many  of  you,  must  sec  what  are  the  elements  and  requisites  of  an 
elastic  currency.  These  requisites,  are  first,  that  there  must  be  no  limit  set  upon  it, 
except  the  demand  for  instruments  with  which  to  exchange  the  consumable  products 
and  materials  moving  through  the  country,  including  such  as  have  been  imported  from, 
or  are  going  to,  foreign  countries ;  second,  it  must  be  issuable  at  once,  as  the  demand 
for  it  arises,  without  waiting  for  somebody  else  to  do  something  else,  and  without 
spending  more  money  in  making  preparations  for  it  than  is  finally  obtained.  The 
present  National  Bank  currency  is  not  and  never  was  an  elastic  currency.  It  has 
great  and  abounding  merits,  but  elasticity  is  not  one  of  them.  Of  late  years  it  has 
been  losing  such  elasticity  as  it  had  in  the  beginning.  Instead  of  expanding  with  the 
wants  of  trade  it  has  been  contracting  in  the  face  of  them.  The  recent  increase  is 
spasmodic,  being  due  to  a  wholly  abnormal  condition  of  business. 

CAN    BOND   SECURITY   BE  DISPENSED   WITH.? 

The  great  merit  of  the  National  Bank  currency  is  its  security.  This  is  due  to  the 
Government's  guaranty,  which  in  its  turn  is  justified  by  the  four  separate  funds  already 
enumerated,  viz.:  United  States  bonds,  the  5  per  cent,  redemption  fund,  the  first  lien 
on  assets  and  the  first  lien  on  shareholders'  liability.  The  Government's  guaranty  is 
always  sufficient  for  the  noteholders.  The  question  is,  whether  United  States  bonds 
can  be  dispensed  with  as  part  of  the  security  of  the  Government.  In  a  former  discourse 
I  gave  reasons  for  the  belief  that  with  a  small  tax  on  bank  notes,  to  be  accumulated 
as  a  safety  fund,  something  like  the  old  New  York  Safety  Fund,  the  bond  security 
could  be  safely  dispensed  with.  Shortly  after  that  discourse  was  delivered  the  Comp- 
troller of  the  Currency,  Mr.  Hepburn,  replying  to  an  inquiry  of  the  Hon.  Michael  D. 
Harter,  wrote  the  following  letter : 

(Copy.) 

"Treasury  Department, 
"  Office  of  the  Comptroller  of  the  Treasury, 
"Washington,  Feb.  24,  1893. 
"  Hon.  Michael  D.  Harter,  House  of  Reps.,  Washington,  D.  C. 

"  Sir  :  I  have  the  honor  to  acknowledge  the  receipt  of  your  letter  of  the  23d  instant.  In 
answer  you  are  respectfully  informed  : 

"1st.  That  you  are  correct  in  understanding  from  my  letter  of  the  21st  inst.  that  the 
taxes  upon  circulation  paid  by  the  National  Banks  to  the  Government,  since  the  organization 
of  the  system  in  1863  to  the  end  of  the  last  fiscal  year  have  aggregated  $72,635,000  in 
amount;  that  the  entire  expenses  of  the  United  States  growing  out  of  the  National  Banking 
system  during  the  same  period  have  amounted  to  $14,585, coo,  showing  a  net  profit  to  the 
United  States  up  to  June  30,  1892,  of  $58,050,000,  and  that  the  Government  during  the 
same  period  has,  by  other  forms  of  taxation,  received  from  the  banks  $72,143,000,  giving 
the  United  States  a  total  net  profit  from  the  National  Banking  system  to  June  30,  1892,  of 
$130,193,000. 

"  You  are  also  correct  in  the  understanding  that  if  the  banks  had  never  given  to  the 
United  States  bonds  as  collateral  security  for  their  notes,  but  instead  a  first  lien  upon  the 
assets,  the  United  States  would,  up  to  June  30,  1892,  have  lost  but  $953,667,  still  leaving  to 
the  United  States  a  clear  net  profit  arising  fjom  the  taxation  of  National  Bank  notes  alone  of 

$^57,096,333- 

"2d.  In  ascertaining  the  loss  which  the  Government  would  have  sustained  up  to  June  30, 

1892,  growing  out  of  the  liability  to  pay  the  holders  of  National  Bank  notes  in  full  in  the 
event  that  the  Government  had  at  no  time  required  the  National  Banks  to  deposit  bonds  to 
secure  circulation,  and  had  in  lieu  thereof  received  a  first  lien  on  all  the  assets  of  such  banks, 
I  have  included  the  sums  received  by  assessment  of  the  stockholders  of  failed  banks,  and  the 
proceeds  of  the  bonds  deposited  with  the  United  States  to  secure  circulation  to  the  extent  of 
the  excess  of  such  bonds  over  the  circulation  secured  by  them.  Under  these  circumstances 
the  loss  which  would  have  resulted  to  the  Government  from  the  insufficiency  of  the  assets  of 
insolvent  National  Banks  to  pay  the  outstanding  circulation  would  have  amounted  to  $953,677 
on  June  30,  1892,  as  staled  in  my  letter  of  the  21st  inst.  Yours  respectfully, 

"A.  B.  Hepburn,  Comptroller.'''' 


It  appears,  therefore,  that  if  there  had  never  been  any  bond  security  for  National 
Bank  notes  the  Government  would  have  lost  less  than  a  million  dollars  by  redeeming 
the  notes  of  all  failed  banks.  To  put  it  in  another  way,  if  there  had  been  a  common 
fund  of  something  less  than  a  million  dollars  accumulated  by  taxation  of  bank  notes 
no  loss  would  have  resulted  to  the  Government.  This  fact  speaks  volumes  for  the 
carefulness  of  the  National  Banking  Law  itself  and  for  the  carefulness  with  which  it 
has  been  administered.  I  have  the  highest  admiration  for  both.  The  astonishing 
record  which  Comptroller  Hepburn  has  here  presented  is  due  to  Governmental  super- 
vision and  inspection  of  the  assets  and  liabilities  of  the  banks.  If  a  bank's  assets  are 
all  right  its  liabilities  of  every  name  and  nature  will  be  properly  met.  Under  the  old 
free  banking  system,  as  it  existed  in  the  West,  exclusive  attention  was  given  to  security 
for  circulating  notes.  The  law  said  virtually  to  the  banks  :  "  Give  us  bond  security  for 
your  notes  and  then  you  may  go  to  the  devil."  When  the  bond  security  went  to  that 
destination  it  was  found  that  the  banks  had  already  preceded  them  thither.  The  doc- 
trine of  laissez  faire  does  not  apply  to  banks,  and  least  of  all  when  they  are  invested 
with  the  power  of  issuing  circulating  notes. 

THE  SCOTCH  BANK  NOTE  SYSTEM. 

Bond  security  for  bank  notes  is  not  consistent  with  elasticity.  If  you  ask  me 
whether  I  consider  elasticity  a  more  valuable  feature  than  security  I  say  decidedly  not. 
Our  aim  should  be  for  both  security  and  elasticity.  Both  are  attained  in  the  Scotch 
system  by  unlimited  liability  of  the  shareholders  of  banks  for  their  note  issues.  Form- 
erly the  liability  of  shareholders  of  all  the  banks  except  three  was  unlimited  as  to  all 
claims  whatsoever,  but  since  the  failure  of  the  City  of  Glasgow  Bank  and  largely  in 
consequence  of  it,  the  unlimited  liability  clause  has  been  repealed,  except  as  to  note 
issues.  Thus  it  has  happened  that  the  notes  of  failed  banks  in  Scotland  have  always 
been  received  by  the  other  banks  at  par  and  have  never  depreciated,  although  they 
had  neither  bond  security  nor  safety  fund  behind  them.  It  is  an  interesting  fact  that 
when  the  Territorial  Legislature  of  Wisconsin  was  considering  the  question  of  repeal- 
ing the  charter  of  George  Smith's  marine  and  fire  insurance  company,  he  proposed 
an  unlimited  liability  clause  as  an  amendment  to  it,  which  would  be  acceptable  to  the 
company.  So  you  see  that  a  safety  fund  is  not  the  sole  alternative  to  bond  security. 
Probably  a  safety  fund  would  be  preferred  in  this  country  by  bank  shareholders,  rather 
than  unlimited  liability  for  note  circulation,  because  unlimited  liability  has  a  very 
threatening  sound. 

NOTEHOLDERS'    FIRST    LIEN   ON    BANKS'   ASSETS. 

Occasionally  some  man  starts  up  and  asks  why  noteholders  should  have  a  first  lien 
on  the  assets  of  a  failed  bank,  and  why  a  preference  should  be  given  to  them  over  de- 
positors. There  are  three  classes  of  creditors  of  a  failed  bank  :  noteholders,  depositors 
and  shareholders.  The  two  latter  have  deliberately  chosen  the  place  where  they  will 
put  their  property,  and  the  depositors  exercise  that  choice  freely  from  day  to  day. 
Noteholders,  as  a  general  rule,  exercise  no  choice  whatever,  for  although  bank  notes 
are  not  legal  tender,  they  cannot  be  refused  in  practice  after  the  law  has  authorized 
their  emission,  so  long  as  the  issuing  bank  keeps  its  doors  open.  This  is  the  reason 
why  nearly  all  the  banking  laws  in  this  country,  and  many  of  the  State  constitutions, 
make  the  circulating  notes  a  first  lien  on  the  assets.  Under  the  National  Banking 
Law,  as  I  have  said,  the  Government  guarantees  the  notes  and  then  secures  itself  in 
four  different  ways.  The  following  clause  in  Section  5230,  Revised  Statutes,  describes 
one  of  them. 

"  For  any  deficiency  in  the  proceeds  of  all  the  bonds  of  an  association  when  thus 
sold,  to  reimburse  to  the  United  States  the  amount  expended  in  paying  circulating 
notes  of  the  association,  the  United  States  shall  have  a  paramount  lien  upon  all  its 
assets,  and  such  deficiency  shall  be  made  good  out  of  such  assets  in  preference  to  any 
and  all  other  claims  whatsoever  except  the  necessary  costs  and  expenses  of  adminis- 
tering the  same." 

GOLD   RESERVES   AND    REDEMPTION. 

If  a  bank  note  system  is  both  elastic  and  secure  we  have  every  requisite  of  a  perfect 
system.  What  we  mean  by  security  is  the  convertibility  of  the  bank  note  into  gold  on 
demand.  We  have  been  learning  in  recent  years  how  small  an  amount  of  gold  is 
needed  to  maintain  the  gold  standard  in  a  country  which  is  not  obliged  to  keep  a  war 


8 

chest.  Fifteen  years  ago  we  accumulated  one  hundred  millions  of  gold  to  guarantee 
redemption  of  about  three  hundred  and  fifty  millions  of  greenbacks.  This  was  the 
proportion  which  prudent  financiers  judged  to  be  necessary.  The  redemption  fund 
was  about  30  per  cent,  of  the  paper  to  be  redeemed.  Well,  we  have  gone  on  from 
that  day  to  this  adding  to  our  stock  of  fiat  money,  partly  silver  dollars,  partly  Treasury 
notes,  till  we  have  piled  six  hundred  millions  on  top  of  the  original  three  hundred  and 
fifty  millions.  We  have  now  nearly  one  thousand  millions  resting  on  the  original 
gold  reserve,  the  redemption  fund  being  only  10  per  cent,  of  the  fund  to  be  redeemed. 
I  acknowledge  my  own  surprise  at  this  outcome.  It  is  only  within  four  or  five  months 
that  signs  have  appeared  in  the  financial  firmament  that  the  limit  of  fiat  money  that 
can  safely  rest  on  one  hundred  millions  of  gold  has  been  reached.  I  only  regret 
that  this  additional  circulation,  for  which  we  see  there  was  a  real  demand,  was  ob- 
tained at  such  a  costly  rate  by  the  purchase  of  silver  bullion,  whereas  the  public  might 
have  been  more  easily  and  accurately  served  with  bank  notes,  which  cost  nothing  but 
the  printing — as  the  Northwest  was  served  with  George  Smith's  money  back  in  the 
forties,  but  in  a  more  orderly  way.  I  say  bank  notes,  not  Government  notes,  because  I 
hope  to  see  the  Government  go  out  of  the  banking  business  altogether.  Another 
reason  why  bank  notes  are  preferable  is  that  they  are  continually  balancing  each  other 
in  the  trade  of  the  country,  just  as  checks  do.  In  other  words  they  redeem  them- 
selves without  the  use  of  gold.  Gold  is  needed  as  a  touchstone  all  the  time,  but  its 
actual  transfer  is  required  only^to  settle  balances  of  international  trade. 

'  BANK  CONSOLIDATION. 
A  third  way  to  dispense  with  bond  security  for  bank  notes  would  be  by  bank  con- 
solidation or  by  making  one  bank  so  large  that  it  could  not  fail,  like  the  Bank  of  Eng- 
land, the  Bank  of  France,  or  the  Imperial  Bank  of  Germany,  and  making  it  the  sole 
issuer  of  the  currency.  The  three  banks  I  have  named  are  not  all  on  the  same  plan. 
They  differ  in  material  respects,  but  they  are  alike  in  one  particular.  They  are  so  large 
and  are  charged  'with  such  weighty  responsibilities  that  their  notes  are  always  safe. 
They  may  at  rare  intervals  suspend  specie  payments,  as  the  Bank  of  France  did 
during  the  war  of  1870,  but  temporary  suspension  is  not  such  a  terrifying  fact  as  it. 
once  was.  It  is  hardly  possible  nowadays  that  any  one  of  the  three  banks  named 
should  suspend  in  time  of  peace.  There  is  a  strong  public  feeling  against  a  new  Bank 
of  the  United  States,  and  this  prejudice  is  not  wholly  unfounded.  The  monopoly  of 
note  issues  enjoyed  by  the  Bank  of  France  would  not  be  tolerated  in  this  country ;  yet 
the  foremost  consideration  in  banking  science  is  solvency.  The  more  capital  a  bank 
has  the  more  likely  it  is  to  remain  solvent.  When  any  financial  flurry  comes,  the  little 
banks  of  $50,000  capital  topple  over  first.  The  large  ones,  unless  they  have  been 
speculating — /.  e.,  doing  something  else  than  a  banking  business — survive,  simply 
because  of  their  heavier  ballast. 

BRANCH    BANKS. 

There  is  no  reason  that  I  can  discover  why  the  National  Banks  should  not  be 
allowed  to  have  branches,  as  the  Scotch  banks  and  the  Canadian  banks  have.  The 
old  State  Bank  of  Indiana  {clarum  et  venerabile  nomen)  which  was  contemporaneous 
with  George  Smith's  institution  and  a  greater  success  even  than  his,  consisted  of 
thirteen  branch  banks,  all  pledged  for  each  other  and  under  each  other's  watch  and 
ward.  This  institution  passed  unscathed  through  the  two  severest  panics  the  country 
ever  saw.  Why  should  we  not  allow  the  large  banks  in  the  cities  to  annex  the  little 
$50,000  concerns  that  topple  over  so  easily,  or  to  establish  others  of  that  size  where 
they  are  wanted  ?  They  will  all  be  stronger,  on  the  same  principle  that  a  bundle  of 
sticks  is  stronger  than  the  same  sticks  taken  separately. 

UNITED  STATES  BONDS  A  VANISHING  QUANTITY. 
One  way  or  another,  gentlemen,  the  bond  security  clause  of  the  National  Banking 
Act  must  be  got  rid  of  before  you  can  have  a  flexible  currency.  We  are  spared  the 
necessity  of  further  argument  on  this  point  because  the  bonds  of  the  United  States  are 
disappearing.  There  has  been  a  temporary  stoppage  of  bond  redemption  by  reason 
of  the  increase  of  pension  payments  and  the  decrease  of  revenue,  but  that  condition 
is  altogether  abnormal.  Pension  payments  will  decrease  and  revenue  will  increase, 
through  natural  causes.  It  is  a  safe  prediction  that  the  present  bonded  debt  will  not 
outlast  the  term  of  its  maturity  in  1907.      It  is  high  time,  therefore,  to  be  thinking 


about  something  else.     Don  t  think  about  railroad  and  municipal  bonds  as  a  substi- 
tute.    The  country  had  that  pestilence  before  the  war. 

STATE   BANK    NOTES. 

It  also  had  the  pestilence  of  State  Bank  notes.  Not  all  of  these  were  bad. 
Indeed,  there  were  more  good  ones  than  bad  ones,  but  the  peculiarity  of  that  system 
was  that  it  took  its  reputation  from  its  bad  ones  and  not  from  its  good  ones.  So,  the 
public  was  all  the  time  on  the  lookout  for  the  bad  ones,  as  a  cook  is  for  suspicious 
eggs,  but  with  the  difference  that  a  bad  egg  always  proclaims  itself,  while  a  bad  bank- 
note does  not.  So  it  would  be  under  any  revival  of  that  system.  Imagine  forty-four 
States  sending  out  bank  notes  under  forty-four  different  banking  laws.  Who  would 
be  able  to  know  anything  about  their  goodness  .''  You  might  as  well  play  forty-four 
games  of  chess  simultaneously  with  your  back  to  the  table.  And  let  me  ask  this 
question  :  If  bond  security  were  dispensed  with  and  its  place  taken  by  any  one  of  the 
three  alternatives  I  have  mentioned,  viz.,  safety  fund,  unlimited  liability  or  bank  con- 
solidation, what  could  the  States  do  for  banks  that  the  National  Government  could  not 
do  better  ?  They  could  not  make  banking  easier,  except  by  relaxing  vigilance,  super- 
vision, examination  ;  that  is,  by  exposing  the  public,  both  depositors  and  noteholders, 
and  shareholders  as  well,  to  depredation. 

We  are  told  that  we  need  a  currency  that  will  stay  in  the  places  where  it  is  issued 
If  that  is  a  desideratum,  make  a  provision  of  law  that  no  bank  shall  pay  out  any  notes 
but  its  own.  I  think  that  is  a  sound  principle,  and  that  it  would  help  to  make  an 
elastic  currency.  This  principle  was  embodied  in  the  laws  of  Massachasetts  and  of 
Louisiana  before  the  War,  two  of  the  soundest  banking  systems  that  this  country  or 
any  country  ever  had.  If  no  bank  pays  out  any  notes  but  its  own  there  will  be  no 
motive  to  send  the  local  currency  away,  because  when  remittances  are  to  be  made  the 
issuing  bank  will  sell  drafts,  as  George  Smith  did,  at  lower  rates  than  could  be  made 
by  shipping  currency, 

CONCLUSION. 

Now,  gentlemen,  my  last  word  to  you  is  this.  In  the  realm  of  sound  banking 
there  is  no  more  reason  for  a  shortage  of  currency  any  year,  or  any  time  of  the  year, 
than  there  is  for  a  shortage  of  bank  checks.  The  nature  of  the  circulating  note  and 
of  the  check  is  the  same.  Both  are  orders  on  the  bank  for  money,  or  money's  worth. 
The  true  fund  for  the  redemption  of  the  bank's  notes  is  the  bank's  assets  ;  that  is  to 
say,  its  bills  receivable.  The  existence  and  bo>ta  fide  character  of  the  bills  receivable 
should  be  a  matter  of  public  concern,  as  it  is  under  the  National  Banking  Law.  It  is  no 
hardship  to  a  bank  to  be  frequently  examined  by  public  officers,  and  nobody  will  ever 
complain  of  such  examination  except  wrongdoers.  The  persons  most  vitally  interested 
in  the  thoroughness  of  such  examinations  are  the  bank's  shareholders,  since  they  are 
the  only  persons  concerned  who  can  lose  more  than  they  have  put  in.  Bear  in  mind, 
also,  that  the  more  rigid  and  intelligent  these  examinations  are,  the  less  of  other  security 
will  be  needed  for  the  protection  of  noteholders,  and  the  less  gold.  Your  gold  reserve 
must  be  big  in  proportion  to  the  badness  of  your  banking  system,  not  to  its  goodness. 

I  shall  append  to  this  discourse  a  copy  of  a  bill  for  a  safety  fund  to  take  the  place  of 
bond  security,  which  I  drew  up  last  January,  at  the  request  of  the  Hon.  Joseph  H. 
Walker,  of  Massachusetts,  and  which  he  introduced  in  the  House  of  Representatives. 
Although,  as  I  have  said,  I  do  not  consider  this  the  only  feasible  plan  for  replacing 
bond  security,  perhaps  not  the  best  one,  I  am  convinced  that  it  is  a  safe  plan.  At  all 
events,  it  will  furnish  a  basis  for  public  discussion,  which  must  precede  any  change  in 
our  present  system.  You  will  understand,  of  course,  that  this  bill  does  not,  in  any 
way,  change  the  present  National  Banking  law,  except  as  to  bond  security. 
A  Bill  to  Create  a  Safety  Fund  for  the  Redemption  of  the  Notes  of  Insolvent  National 
Banks. 

Be  it  enacted,  etc. :  SEC.  i.  That  the  proceeds  of  the  duty  of  one-half  of  one  per 
centum  each  half  year  required  to  be  paid  to  the  Treasurer  of  the  United  States  by 
National  Banking  Associations  on  the  average  of  their  notes  in  circulation,  shall  be 
retained  as  a  separate  fund  in  the  Treasury,  to  be  denominated  the  National  Bank 
Safety  Fund,  until  said  fund  shall  not  be  less  than  per  centum  of  the  whole  amount 
of  National  Bank  notes  outstanding,  and  thenceforth  the  collection  of  said  duty  shall  be 
suspended,  except  as  hereinafter  provided. 

Sec.  2.  The  money  in  said  Safety  Fund  shall  be  appropriated  and  applied  in  the 


10 

manner  hereinafter  provided,  to  the  payment  and  redemption  of  the  circulating  notes 
of  any  of  said  National  Banking  Associations  which  shall  fail  to  redeem  their  notes  on 
demand. 

Sec.  3.  Whenever  the  insolvency  of  any  National  Banking  Association  shall  be 
ascertained  in  the  manner  provided  by  law,  its  outstanding  circulating  notes  shall  be 
redeemed  by  the  Treasurer  of  the  United  States  out  of  said  Safety  Fund  if  the  same 
shall  be  sufficient,  and  if  not  sufficient,  then  out  of  any  money  in  the  Treasury.  As 
the  proceeds  of  its  assets,  including  the  personal  liability  of  shareholders,  if  necessary, 
are  paid  into  the  Treasury  by  the  Receiver,  in  the  manner  now  directed  by  law,  before 
any  dividend  shall  be  paid  to  depositors,  or  any  other  creditors  of  the  bank,  the  Safety 
Fund  shall  receive  a  sum  equal  to  the  outstanding  circulation  of  such  insolvent  National 
Bank,  as  far  as  the  proceeds  of  such  assets  permit.  If  such  proceeds  are  in  excess  of 
the  amount  required  to  redeem  the  circulation,  such  excess  shall  be  divided  among  the 
depositors  and  other  creditors  in  the  manner  now  provided  l)y  law. 

Sec.  4.  Whenever  the  percentage  of  money  in  the  Safety  Fund  shall  be  reduced,  or 
shall  become  liable  to  reduction  through  bank  failures,  the  Comptroller  of  the  Currency 
shall  notify  the  Treasurer  of  the  United  States  of  the  amount  which  he  deems  neces- 
sary to  make  good  such  deficiency,  and  the  Treasurer  shall  thereupon  resume  the  col- 
lection of  the  duty  of  one-half  of  one  per  centum  each  half  year  on  circulating  notes 
until  such  deficiency  or  estimated  deficiency  is  supplied.  And  the  United  States  shall 
be  paid  out  of  said  Safety  Fund,  when  replenished,  for  all  advances  made  in  pursuance 
of  the  preceding  section,  together  with  interest  at  the  rate  of  four  per  centum  per 
annum. 

Sec.  5.  Whenever  the  amount  of  money  in  the  Safety  Fund  shall  be  equal  to  one- 
fourth  of  the  maximum  sum  prescribed  in  the  first  section,  each  of  the  Associations 
issuing  circulating  notes  shall  have  the  right  to  withdraw  a  portion  of  its  bonds  held  by 
the  Treasurer  of  the  United  States  to  secure  its  circulation,  as  nearly  equal  to  one-fourth 
of  its  whole  deposit  as  may  be,  in  multiples  of  one  thousand  dollars ;  and  with  each 
successive  increment  of  one-fourth  of  said  maximum  sum  in  the  Safety  Fund  said  Asso- 
ciations shall  have  the  right  to  withdraw  a  like  amount  of  such  bonds  in  the  manner  and 
proportion  aforesaid.  When  the  Safety  Fund  contains  the  maximum  sum  prescribed 
in  the  first  section,  the  said  Associations  may  withdraw  the  residue  of  such  bonds,  pro- 
vided, however,  that  each  Association,  whether  issuing  circulating  notes  or  not,  shall  keep 
on  deposit  with  the  Treasurer  bonds  of  the  United  States  to  the  amount  of  not  less 
than  five  thousand  dollars  at  the  par  value  thereof ;  provided,  also,  that  any  Association 
not  issuing  circulating  notes  and  having  more  than  the  minimum  of  five  thousand  dol- 
lars in  bonds  on  deposit  may  withdraw  the  excess  over  five  thousand  dollars  at  any  time 
alter  the  passage  of  this  act.  It  shall  be  the  duty  of  the  Treasurer  of  the  United  States 
to  transfer  and  assign  to  such  Associations  their  bonds  from  time  to  time  as  they  may 
be  entitled  to  receive  same  in  pursuance  of  this  act. 

Sec.  6.  National  Banking  Associations  organized  after  the  passage  of  this  act  may 
receive  circulating  notes  from  the  Comptroller  upon  paying  into  the  Safety  Fund  the 
percentage  fixed  in  the  first  section  hereof,  and  existing  Associations  desiring  to  take 
out  additional  circulation  may  do  so  on  the  same  conditions,  but  nothing  in  this  act 
shall  change  the  proportions  between  circulation  and  paid-up  capital  as  now  estab- 
lished by  law.  For  all  sums  paid  into  the  Safety  Fund  in  pursuance  of  this  section 
allowance  shall  be  made  in  subsequent  collections  of  the  duty  on  circulating  notes  for 
said  Safety  Fund,  until  the  payments  shall  have  been  equalized  as  nearly  as  may  be 
among  the  Associations  required  to  contribute  thereto  on  the  basis  of  their  circulation, 
which  equalization  shall  be  determined  by  the  Comptroller. 

Sec.  7.  No  Association  or  individual  shall  have  any  claim  upon  any  part  of  the 
money  in  sa  d  Safety  Fund,  except  for  the  redemption  of  the  circulating  notes  of  insol- 
vent National  Banking  Associations  as  herein  provided.  Any  overplus  or  residue  of 
said  Safety  Fund  which  may  be  hereafter  ascertained  and  determined  by  law  shall 
inure  to  the  benefit  of  the  United  States. 


[1461E] 


P.TURNTO:     C.RCUUAT.ON  DEPARTMENT 
RETURN  lu-      ^gg  Main  Stacks 


Renewals  and  Be*X  c*g  642-3405. 


FORM  NO.  DD 6 
50M 


Berkeley.  California  94720-O 


amaer 

Ciaylord  Bros.,  Inc. 

Stockton,  Calif. 

T.  M.  Reg.  U.S.  Pat.  Off. 


M19443 


THE  UNIVERSITY  OF  CALIFORNIA  LIBRARY 


...^.m^' 


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